Kion Group AG

XETRA:KGX

Earnings Call Analysis

KION's Record Revenues and Strong Outlook

In 2023, KION Group saw robust profitability growth, particularly in its Industrial Truck & Services (ITS) segment, aided by improved material availability and operational agility. Record-high revenues resulted from better volumes and pricing, with adjusted EBIT margin soaring by 430 basis points to 6.9%. Steered by notable free cash flow, which allowed a significant debt reduction and a dividend increase to EUR 0.70 per share, KION reinforced investor confidence. While order intake slid by 7% from the prior year, it remained high. Moving forward, KION anticipates low to mid-single-digit revenue growth in 2024, with EBIT margins expected to sustainably stay above 10%, and a free cash flow forecast between EUR 550 million and EUR 670 million, albeit below the previous year's level due to tax payment timings. The company targets a Return on Capital Employed (ROCE) ranging from 7.4% to 8.8%.

A Year of Robust Recovery and Record-High Performance

In 2023, the company experienced a strong rebound in profitability, especially within the Industrial Truck Segment (ITS), as operational agility and commercial measures such as price increases significantly improved results. Supply Chain Solutions (SCS) aligned with projections, with only a slight drag from one-off expenses. On the whole, the company not only met but also surpassed major key performance indicators (KPIs)[7†source].

Consistent Order Intake and Revenue Surge to New Heights

Despite a 7% year-on-year decrease, order intake has remained robust across all segments while revenue achieved new record highs, thanks to enhanced product volumes and pricing. The record revenue and solid order book provide a stable base for future operations[8†source].

Significant Advancements in Profitability and Cash Flow

The adjusted earnings before interest and taxes (EBIT) margin soared by 430 basis points to 6.9%, while free cash flow made an impressive turnaround, exceeding EUR 1.4 billion to hit a record EUR 715 million[9†source].

Increased Shareholder Confidence through Raised Dividends

The company proposed a significantly increased dividend of EUR 0.70 per share, marking an increase from the previous year's EUR 0.19 per share and corresponding to a 30% payout ratio[10†source].

Sustainability Commitments and Safety Enhancements

Committed to the Science Based Targets initiative (SBTI), the company has set bold long-term goals for net-zero greenhouse gas emissions by 2050 at the latest. Additionally, safety improvements have been noted with a 10% reduction in lost time injury frequency rates[11†source][12†source].

Record Order Book and Margin Sustainability Amid Legacy Projects

New equipment purchases grew significantly, enriching the order book, while quarterly revenue reached an all-time high maintaining solid margins. Even though the adjusted EBIT margin slightly decreased due to higher proportions of new equipment sales, margins have stayed resiliently above 10%[13†source][14†source][15†source].

Adapting to Market Dynamics with Strategic Pricing

The company successfully navigated market challenges with tactical pricing adjustments, refraining from price increases in 2023 after multiple increases in the previous year, and preparing for another hike in early 2024[16†source][17†source].

Operational Updates and Market Outlook

The company has made considerable progress in resolving legacy project complications and anticipates further impact on SCS order intake. Strong fourth-quarter revenue highlights the company's ability to exceed EUR 3 billion and underscore its market strength[18†source][19†source].

Financial Position and Profit Expectations

Net income led to an EPS of EUR 0.63 in the quarter, solidifying its financial position, along with a strong free cash flow typical in the fourth quarter. While leverage ratios improved significantly, S&P has maintained the company's investment-grade rating but with a negative outlook. Going forward, Adjusted EBIT margins are expected to stay sustainably above 10%, accompanied by a forecast for a strong second half in terms of profitability[20†source][21†source][25†source][26†source][27†source].

Future Revenue Growth and Cash Flow Projections

The company anticipates low to mid-single-digit growth in revenue for ITS in 2024, with adjusted EBIT margins expected to persist above 10%. For 2024, a stable to low single-digit revenue growth is expected, and free cash flow is projected to be slightly lower than the exceptional level in the previous year[28†source][29†source][30†source].

Production Expansion and Strategic Focus

In response to growing demand, particularly from the China market, the company has nearly tripled its production over the previous year and launched 30 new models, which is an incredible testament to its expansion and innovation strategies[34†source][41†source].

Solidifying Market Position and Moving Towards Higher Margins

The company is steadfast in its commitment to improving profitability, especially in its SCS business, aiming to achieve margins beyond 10% by the end of 2027. This intention underscores its ongoing efforts to solidify its market position and enhance financial metrics[45†source][46†source].

Financial Strategy and Key Performance Indicators

The covenant test was on hold, but S&P has since adopted a comprehensive approach to evaluating the company's financials. Key performance indicators, such as deleverage around 4% and an EBITDA margin above 16%, are the focus for continued financial strategizing[47†source].

Forward-Looking Statements and Shareholder Engagement

The company expressed gratitude for engaging questions during the call and is eager to meet with shareholders and analysts in the coming weeks and months. Anticipation builds for the first quarter results announcement at the end of April[48†source].

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, welcome to the KION Group's Q4 Full Year 2023 Update Call. Today's presenter will be Rob Smith, CEO of KION Group; and Christian Ham, CFO of KION Group. I am Alice the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Rob Smith, CEO of KION Group. Please go ahead, sir.

[Richard Smith, executive]

Thank you, Alice. Good afternoon, ladies and gentlemen, and welcome to our fourth quarter and full year 2023 update call. For today's call, please see our presentation on our IR website. I'm going to start with a summary of our full year 2023 as well as with an update on our ESG journey. And then Christian will take you through our Q4 financials and the outlook for 2024. I'll take you through the key takeaways, and then we'll ask Alice to transition us back into a question and Ansible. Let's start on Page 3 together. Fiscal year 2023 was marked by a strong rebound in profitability driven in particular by our ITS segment. Material availability improved considerably compared to 2022. And that's not only due to supply chains improving, but it's also a result of the measures we took to improve our operational agility, enabling us to flexibly react to fluctuations in the availability of materials and components by switching to different product lines and enabling us to make use of each of each planned production slate. In addition, measures to improve commercial agility, such as our multiple list price increases in 2022, also had a positive impact on the ITS results in 2023. Supply Chain Solutions performed in line with our expectations for a stronger second half versus the first half despite the second half being impacted by a one-off expense to close off the legacy project. We achieved our guidance on the group level, and we're successful in improving all major KPIs, in some cases, by a substantial margin. Order intake remains at high levels in both segments. As anticipated at the beginning of last year, 2023 saw further normalization of our relevant markets for both segments after 2 coded and lockdown-driven boomers, which is reflected in the 7% decline in order intake compared to the year 2022 ahead. Revenue reached record levels, boosted by improved volumes and pricing in combination with positive effects from our measures to improve operational agility, the adjusted EBIT margin improved by 430 basis points to finish at 6.9% for the year. Free cash flow swung by more than EUR 1.4 billion to come in a record high positive EUR 715 million, driven by earnings and net working capital improvements. This allowed us to reduce debt by EUR 460 million compared to the end of 2022. The positive developments of earnings and free cash flow allows us to propose to the AGM on May 29 of this year, a substantially increased dividend of EUR 0.70 per share. This compares with EUR 0.19 per share last year. The proposed dividend corresponds to a payout ratio of 30% and is thus well within our 25% to 40% range, and it reflects our continued efforts to support our investment-grade ratings. Let's move to Slide 4, and I'll update you on the progress we've made on our ESG road map. In July last year, we firmly committed to the science-based targets initiative, or SBTI, thus adopting a framework to align our operations towards the goal of the Paris Agreement on climate change. Through SBTI, KION established the long-term target of achieving net 0 greenhouse gas emissions by 2050 at the latest as well as setting corresponding interim targets by 2030. We're aiming for a validation of these targets this year. In 2023, the share of our electrified trucks in order intake reached 91%, thus surpassing the 2027 target of 90%. And in 2023, we continue to focus on improving the safety in our work environment. We reduced a 10% the lost time injury frequency rate compared to the previous year. We're pleased to announce that KION was included in the S&P Global Sustainability Yearbook in 2024. This is an important recognition in places KION in the top 15% of our industry. We're also proud that still and Linde Material Handling received the Platinum Sustainability awards from EcoVadis, placing steel and Linde Material Handling in the top 1% of companies assessed by EcoVadis, and the Dematic Group was awarded the EcoVadis Gold rating, placing Dematic in the top 5% of companies assessed by EcoVadis. Let's hand over to Christian now, and he'll take you through our Q4 financials and the outlook for 2024. Christian?

[Christian Harm, executive]

Yes. Thank you, Rob. Let's go to Slide 6 for the key financials of the ITS segment. Order intake of 67 units increased significantly compared to the prior and the prior quarter level, bringing the full year 2023 unit order intake just 242,000 units, down to 10% versus the 2022 level and thus fully in line with our expectations, as communicated throughout last year. There may have been some tailwind in the fourth quarter from a small single-digit price increase announced early December 2023 and effective from the 1st of January this year. The year-over-year increase in order intake in units was more pronounced than in money terms due to the new equipment growth outpacing the growth in services. Overall, the order book remains at robust levels and supports half a year of new business revenue despite high production run rates, particularly in the last 3 quarters. Margin the order book remained solid. Revenue reached a record quarterly level supported by last year's price increases as well as favorable material availability, allowing a high run rate in production and thus in shipments. The adjusted EBIT remained on the high level of the prior quarter and nearly doubled compared to the prior year quarter, supported positive effects from the volume and price-driven revenue growth as well as production efficiency gains resulting from the ongoing measures to increase our operational agility. The adjusted EBIT margin remained above 10%. It was slightly lower than in Q3 due to a higher share of new equipment in the revenue. I continue on Page 7, which summarizes the key financials for SCS. Overall macroeconomic uncertainty as well as higher financing costs continued to have an impact on order intake as decisions to start new projects continue to be postponed. We will, therefore, still expect order intake to remain lumpy over the next quarters. Order intake in the fourth quarter was driven by pure play e-commerce and on a solid level despite the absence of single large orders like in the past 2 quarters. There was one high double-digit million euro project cancellation. Adjusting for that, the order intake would have been on the same level as in the prior quarters. Cancellations are very rare in this business. And if they occur, it results from extraordinary situations. In this case, our customer was acquired, and the new owner decided to put all capital expenditure projects on hold. The order book continues to provide visibility for the next quarters. Approximately 90% of the order book now has price adjustment clauses, which provides protection from unexpected hyperinflation going forward. Overall, revenue increased sequentially, but was still below the prior year level as the single-digit increase in the service business did not compensate for the decline in the project business. Lower orders from purely e-commerce customers in past quarters and adverse currency effects also had a negative impact on revenue in the quarter. The adjusted EBIT and the adjusted EBIT margin is in line with our expectation for a stronger second half compared to the first half of the year and included a mid- to high single-digit million euro onetime expense to complete legacy projects that was not part of our guidance. Speaking of legacy projects, we made significant progress in working through these in 2023. Before we move on, I'd like to give you a heads up on an immaterial presentation change that will impact SCS order intake and order book going forward. Starting 2024, we are aligning the treatment of order intake in the customer services business of STS to the methodology applied in ITS. There will be no restatement of past years, but we have included in the appendix of this presentation a table showing the effect this change would have had is already applied in 2022 and 2023. Let's quickly run through the key financials for the group on Page 8. The increase in order intake was driven by the seasonal recovery seen in ITS in the fourth quarter. The order book reflects the progress in lead time reduction in ITS and continues to provide good workload for the next quarters. Revenue in the fourth quarter exceeded EUR 3 billion, driven by a very strong ITS new business performance and the resilient service business in both segments and thus compensating for Software Business Solutions revenue at SCS. In Group improved adjusted EBIT and the adjusted EBIT margin strongly in the year-over-year comparison, while being down slightly sequentially. Page 9 now shows the reconciliation from the adjusted EBITDA to group net income. Depreciation and amortization as well as PPA items followed the usual quarterly pattern. Nonrecurring income increased strongly in the quarter. and included approximately EUR 25 million of expenses related to measures to streamline our cost base at SCS. We saw a strong increase in net financial expenses, mainly driven by higher interest rates, higher net interest expenses for the leasing and short-term rental business as well as a negative impact from the fair value of interest derivatives. As a result, pretax earnings reached EUR 101 million. Tax expenses were positively impacted by the revaluation of deferred tax assets. This brought the full year tax rate back within our guided range after a temporary increase in the second and in the third quarter. Net income of EUR 83 million led to earnings per share of EUR 0.63 in the quarter. Let's now continue with the free cash flow statement on Page 10. Free cash flow in the quarter reached EUR 386 million and thus exceeded the level of the first 9 months of 2023. It's quite typical at key on that the fourth quarter is the strongest free cash flow quarter in any given year. The improvement was driven by better earnings as well as the release in net working capital. This was driven by lower inventories in both work in progress as well as finished goods and lower trade receivables. An unfavorable development in contract assets and liability partly offset this positive development. Included in our fourth quarter free cash flow number is an additional funding of EUR 50 million into our company pension team. Page 11 shows the development of net financial debt and our leverage ratios. Most of the positive free cash flow in the fourth quarter was used to reduce the net financial debt to EUR 325 million compared to the end of the third quarter. As flagged in our last call, leverage ratios improved significantly compared to the last quarter, driven by the last 12 months EBITDA calculation, which no longer includes the weak third and fourth quarter 2022 EBITDA numbers. As a result, the leverage ratio on industrial net operating debt was reduced from 1.7x at the end of September 2023 to 1.5x. The leverage ratio on industrial net debt improved from 2.1x at the end of the third quarter of 2023 to 1.9x. The -- compared to the year-end 2022, the improvement is even more pronounced as the leverage ratio on industrial net operating debt was reduced from 2.3x to 1.5x, and the leverage ratio in industrial net debt improved from 2.8x to 1.9x. On the 5th of February 2024, Standard improves affirmed the investment-grade rating for KION with negative outlook. We remain committed to improve leverage matrix further to defend our 2 investment-grade ratings as we believe they are supportive to our business model. Page 13 now lays out our guidance for 2024. You will find a summary of our key assumptions for the guidance in the appendix. After 2 years of normalization following boom years during the [ pandemic ], we expect the market for industrial trucks to show slight growth driven by EMEA and APAC, while Americas is expected to decline further. Based on our order book at the end of 2023 and our industrial truck market expectations for 2024, we believe a low to mid-single-digit increase in revenue is achievable for ITS. Adjusted EBIT margins are expected to sustainably remain above the 10% mark. For SCS, we expect the market to return to slight revenue growth driven by the advancing trends in automation, lower capital costs in the course of the year and continued demand for mobile automation solutions. We don't expect revenue in SGS to benefit from this already in 2024 as there was a lower share of fast-turning projects in the order intake in 2023. Despite the anticipated lower revenue, we expect an improvement in adjusted EBIT due to a lower number of legacy projects in execution as well as some benefits from measures to adjust our cost base. In terms of phasing, SCS revenue should be more or less equally distributed among the 4 quarters. With regards to adjusted EBIT at SGS, we expect a much stronger second half compared to the first half of the year as we anticipate the first half of the year to be much more impacted by the execution of legacy projects than the second half of 2024. In addition, the measures we are implementing to adjust our cost base will increasingly contribute to the bottom line from the later part of the year onwards. At KION Group level, we expect a stable to low single-digit growth in revenue and a stable to nearly 19% growth in adjusted EBIT. While group revenue should show a rather equal distribution across the 4 quarters. Group adjusted EBIT should be slightly stronger in the second half than in the first half, which should be reflected in the Q1 results. Free cash flow between EUR 550 million and EUR 670 million is expected to be below the excellent prior year level, mainly to the time lag in tax payments for the fiscal year 2023 and higher tax prepayments for the fiscal year 2024. And lastly, ROCE is expected between 7.4% and 8.8%. As always, you will find a slide on the housekeeping items in the appendix of this presentation. And with that, I hand back to Rob for our key takeaways.

[Richard Smith, executive]

Thank you, Christian. Let's turn to Page 14 for our key takeaways of the presentation. As Christian outlined, 2023 was a good year for KION and particularly for our ITS segment. KION more than doubled the adjusted EBIT and margin in 2023 with outstanding free cash flows. Our outlook for 2024 is supported by our expectation that both the industrial truck and warehouse automation markets will show slight growth following a year of normalization in 2023. And we, therefore, have strong momentum going into 2024, targeting further margin improvements with H2 being expected to be stronger than H1 2024 in our Supply Chain Solutions segment. This does conclude the presentation. Thank you for your interest. We're looking forward to taking your questions. Let's ask Alice to shift us into question-and-answer mode.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] This question comes from Sven Weier, UBS.

[Sven Weier, analyst]

The first one is really on the SCS margin outlook. And I was just wondering, given that you have the 10% target by 2027 for the group and for the divisions I was just wondering if you feel happy with the setup that you have currently, you've done some restructuring measures in Q4. You have the phasing out of the legacy orders this year. Do you think it's going to be a steady improvement towards the 10%? Or is it going to be back-end loaded? How do you feel about visibility for getting back to [indiscernible]? That's the first one.

[Richard Smith, executive]

Sure, Sven. Good to hear from you, and it's a good question. Let's start by -- let's recognize that the legacy projects that we're still working through do have a drag on margins. From the perspective also that the lower 0-margin legacy projects is a gross profit level, and so they're negative EBITDA. New projects we've taken on board support our greater than 10% adjusted EBIT margins expectations by the end -- now turn into those legacy projects. We made good progress on completing those during the course of last year. The few remaining projects this year will continue to impact our results, but we expect we closed a meaningful amount last year and expect to close most of the rest of them this year. In addition, the price adjustment clauses that were not in our contracts prior to Covid, we have been able to build into now about 90% of our order backlog in SCS, which should protect us against unexpected hyperinflation in the future. We expect to close most of the remaining legacy projects in 2024 with only a few remaining for 2025. However, it does include one large project. The internal process improvements we've made for supply chain management processes are also showing effect -- we expect it will take more time to show full effect given the long-term nature of the business. That's going to give us an ability. We talked about this year, we expect, as was the case last year, the second half to be higher profitability than the first half as we close further legacy projects in the first half. And as the measures we took to streamline our cost base will have increasing effect from the second half of this year. So, we expect margins to improve meaningfully this year. We expect them to improve meaningfully next year. And as we get higher revenues next year and the year beyond, we're certainly on track to bring exactly what we said, which is returning our profitability in Supply Chain Solutions over 10% in the strategic planning period by the end of 2027.

[Sven Weier, analyst]

Thank you, Rob, for the color. It sounds a pretty steady development and not like a very back-end loaded on. The second one was just on the market outlook. I was just wondering if you could give us a little more color on how you see the pipeline because you're talking about slight growth on the truck side and on the SCS side in the orders. And if I remember correctly, when I listen to the feedback from the January conference that you attended, I thought it sounded a bit more positive, to be honest, because I thought you said you also think you can gain share on the truck side with especially the mid-market products that you have now and gain back Shachar maybe that you lost during the pandemic -- and also on the SCS side, I mean, I'm mindful of the fact that last year, Q1 was extremely low in terms of the order intake. So, by having a normal Q1 alone, that would already probably give you a better full year orders. And I guess the question is really how you look at the conversion of the pipeline that you have. Is it -- do you think it's too dependent on lower rates? Or what do you think the clients are waiting for.

[Richard Smith, executive]

Sure Sven. Another good question. Let's go back a couple of years to the boom years in -- during Covid where the SCS market went up very, very significantly. It's come down since then, and we actually see this year, there's a year where we think there'll be some slight revenue growth in the Supply Chain Solutions market in 2024. As you see in our guidance, we're calling out that this improvement will start to affect our revenue line in 2025. As we finished last year, there was a significant amount of longer-term projects in the order book, which is why we're calling the revenue levels in '24 the way we see them. I think the market outlook that you're describing, it's nice to be talking during a time when people are expecting over time, interest rates to come down. We have been very clear starting back in 2022 second half, people very much slowed down their order intake based on economic uncertainty and increasing interest rates and that made the -- that built the order book that we had at the end of last year, and therefore, our expectations for '24 and beyond. If we look at the ITS market, also after 2 years of normalization, we see some slight growth in the ITS market this year. primarily in Europe and Asia Pacific, we expect North America still to be down. What I did call out back into last year is we're introducing and who we have introduced a new line of trucks introduced in China and then built in China for export as well. And we expect that they've already helped us build market share in China as we've entered the value segment there with the new product line. And we will help our market share in Europe and the Americas as well. So, I think that's a good outlook for you. Once again, we see both markets growing slightly this year, and we maintain our expectations for about 4% compound annual growth in the ITS market over the strategic planning period. And over that same period, about 9% compound annual growth in the Supply Chain Solutions market.

[Sven Weier, analyst]

Very good. Thank you, Rob.

[Operator]

Your next question comes from the line of Gael de-Bray with Deutsche Bank.

[Gael de-Bray, analyst]

Everyone I have 3 questions, actually. Can I take them one after the orders? The first one is on the inventory and receivable terms that remain pretty high, at least much higher than 3 covid levels. And looking at the free cash flow guide, it seems that you do not really assume any working capital release in 2024. So, I guess my question is, why are the inventory turns in particular, so high? And why don't you expect any working capital optimization in the course of 2024?

[Richard Smith, executive]

So [indiscernible] sort of to take those 2 elements of your question, right? So -- so why is it high, right? So, you've seen actually, we had a pretty good development in the net working capital in the course of the fourth quarter, but we did not see the same kind of development in the prior 3 quarters. Remember, we have also been talking throughout the year about sort of a stabilization of the supply chains. That was not the case to the same extent that we have at the end of the year at the beginning of the year, right? And so in the course of how we -- that progress, that also helps us to get back to inventory levels that we have also seen precrisis levels. And over the year, we are not yet quite there where we want to be. And therefore, to the second part of your question, actually, our guidance for the free cash flow includes a significant improvement of the net working capital position, but it also includes, as I laid out in the explanation of my outlook, a significant impact from the accumulation of the tax payments on 2023 and the increased prepayments in the year of 2024. And that needs to be taken into consideration when comparing the cash flow of 2024 with the prior year cash flow.

[Gael de-Bray, analyst]

Just to perhaps put the things in your context, longer term, what sort of working capital optimization, would you aim to achieve either in terms of working capital to sales ratio or in absolute numbers?

[Richard Smith, executive]

See the way we look at that is actually in terms of what's the cash conversion cycle. So how fast is actually the net working capital coming back. I think that's the right way of looking at that. At the end of last year, we have not been a prior level of sort of the pandemic or the Covid times, right? And this is the level that we are looking for, right, and targeting over the next 3 years to get back to that level consistently.

[Gael de-Bray, analyst]

Okay, over 3 years. Okay. All right. And then the other question I have is on SCS. I think a quarter ago, you had indicated that the share of the SCS backlog with gross margins lower than normal was about 20% -- perhaps can you provide an update on this? And any indication on how the average gross margin in the backlog compared to 1 year ago would also be pretty useful.

[Richard Smith, executive]

Gael, it's Rob. Appreciate your question. Let's kind of re zero that conversation. What we've been reporting over time, and now it's over 90% is the amount of the order backlog that we've got -- that we have now covered or indeed included in those contracts, price adjustment clauses should there be hyperinflation. And that's been an important element of protection against future unexpected hyperinflation developments. What we've also talked about is the rate at which we've been working through our legacy projects. And maybe I'd refer you to the answer I gave Sven on the progress we've been making on chewing through and finishing off those legacy projects. There was good progress in the first half of last year, good progress this year. We expect to close out most of the rest of them during the course of this year. There will be a few that carry on in the next year. There is one large one there. And what we should all see as well is the profitability improvements for the second half of this year being supported by the beginning of the streamlining cost savings based on streamlining our cost base during the course of this year, which will have effect in the second half. And then going into next year, we expect further profitability increases in that business from having made the good progress on the legacy projects as we've described over the last calls and as we're happy reporting in today.

[Gael de-Bray, analyst]

Just to be clear, when you say 90% of the backlog now has escalation closes, does that mean or does that imply that the legacy backlog with low gross margin for slating into negative EBIT margin is around 10% or less?

[Richard Smith, executive]

No, let's put those apart. What we've been describing since the second quarter of 2022, the contracts we've taken since in, we've been very consistent about winning price adjustment clauses to protect the contracts over their lifetime from hyperinflation during the execution phases of those contracts. And as we built that order book since the middle of '22, that's what we've done. The legacy projects were projects that were affected in the summer of 2022 reported in the summer of 2020 also, where the cost expected to complete those projects increased significantly and brought those projects to either lower or in some cases, no gross margins. Most projects in execution during 2022, had actually been projects we'd sold in 2019, 2020, some in 2021. So please understand that differentiation.

[Operator]

Your next question comes from the line of Akash Gupta with JPMorgan.

[Akash Gupta, analyst]

Christian. I have 2 as well. The first one is on ITS and that's regarding the ramp-up of China production facility. So maybe if you can tell us about where do we stand in the ramp up of that factory? And how much incremental revenues are you expecting in 2024 versus last year? And is this the maximum you can go? Or is there a possibility of further ramp-up growth in '25. So that's the first one to start with.

[Richard Smith, executive]

So that we've been talking about that for a while, gosh, I'm happy to ask. You recall, we launched that factory. We opened the factory very end of 2021. There was -- we produced in 2022 ahead of our business plan, and we almost tripled the production last year vis-a-vis 2022. And clearly, there is further room in that factory. We built it to support the growing China market. We built it to support our growing market share in the China market. And we also built it, of course, to support the value segment outside of China. Last year, we launched 30 new models from the factory during the course of last year, completely in line with the launch schedule. Quite a few of those were for export. We'll be launching another 8 products coming out of the factory again this year. So clearly, there's room to grow that. And it's been -- it's a tripling in production volume in '23 versus 2022, and we expect to ramp it up even further this year.

[Akash Gupta, analyst]

And my follow-up question is on net interest expense guidance of EUR 170 million to EUR 190 million. Christian, can you help us separating how much of this is coming from the lease interest? And how much of this is cash interest related to gross debt? And what is the additional related to pension and other items.

[Christian Harm, executive]

Yes. So, you can actually imply that they're giving our ramp-down of our financial debt, there will be a lower impact of the pure financing piece in the guidance included is an element of financial expense that's coming from derivatives and the fair value evaluation of the derivatives. And that will also continue to be given the growth that we have in the business, the negative impact that we have from the leasing and short-term rental business. That's as far as I would like to go at this point.

[Akash Gupta, analyst]

Is it possible to split out the last part, the leasing and rental business that out of this EUR 170, 190 roughly, how much is for leasing and short-term rental.

[Richard Smith, executive]

No, that's not because it's actually also tied up with the derivatives and such, actually, it's not a separate position that is to be looked at as a main separate items do not disclose this.

[Operator]

The next question comes from the line of Martin Wilke with Citi.

[Martin Wilkie, analyst]

Yes. It's Martin from Citi. Just a couple of questions perhaps related. The first one was on your order commentary for industrial trucks in 2024. You mentioned in the press release, you expect slight growth on order numbers. And I just want to clarify if that is units or value terms or perhaps both? And then linked to that, now that supply chain shortages are easing and lead times are easing. Perhaps you could talk a little bit about the pricing and discounting mechanism in the truck business? Are you seeing anything changing there in terms of the pricing environment in trucks?

[Richard Smith, executive]

Martin let's clarify my comments about the market in ITS was we expect that the market in ITS shall grow during the course you'll recall, it's come down in the previous 2 years. We expect that to turn back around this year, primarily in Europe and in China. We think the market will decline a bit more in North America during the course of this year. We stopped guiding on order intake explicitly for our segments last year, and so we're not going to pick up and back up again. If we then however address your -- the second half of your question. Martin, give me a quick -- give another bullet point there for I can help you with the -- so I can be very specific about the second half of your question? Yes, the pricing. Exactly, yes. Yes. Yes. I mean what we've talked about, and I've been very explicit about, we put some very appropriate process improvements into our business. We talked about the -- in this case, the commercial agility measures to be able to very consciously be measuring our cost levels in our businesses a couple of times a month and making choices each month on making any price adjustments based on knowing the costs very well, understanding the market, understanding the competitive situation there and making deliberate choices on pricing. That enabled us to make 4 price increases during the course of 2022. It also enabled us, we measure every month to make the choice every month. During 2023, we did not make any further price increases. From the beginning of January this year, we announced this in the fourth quarter of last year. We put another price increase into the HGS market, low single digits. And that's a deliberate set of thinking and choices that we're making based on good understanding the cost base and good understanding of the competitive market. And that's the capabilities we have, and those are the decisions we've been taking.

[Christian Harm, executive]

If I may add, Rob. I think what we see is that competition is actually acting very rationally on pricing. So that may help you from an opinion.

[Operator]

Your next question comes from Sebastian Growe with BNP Paribas.

[Sebastian Growe, analyst]

The first one would be around the order backlog in the SCS business and the related visibility for 25. So, you mentioned several times that there's a lower share of fast-turning projects in the order backlog. And hence, obviously, I think that also explains part of the revenue decline that you guide for 24 million. So, I do appreciate it on earnings call or '24. But nonetheless, how should we think of the distribution of SCS order backlog for '24 as opposed to 25%? And if I may then also continue on the -- I heard your comments around the order funnel, but obviously, it appears that momentum in the market has been increasing. And do I read you so far comments correctly as to the sort of EUR 900 million undistorted order intake level per quarter is kind of where you feel comfortable with at this point?

[Richard Smith, executive]

Maybe Sebastian, I'll take the first question that you had on the order backlog. I think if you look at the backlog at the end of fourth quarter last year, and if you think about our guidance in revenue, right, for this year, I think that gives you a good view in terms of to what extent that actually will track out also into 2025, when it comes to the backlog. I think when it comes to the pipeline and the momentum that you are describing for the pipeline, I think the one thing we need to consider is that overall, I think the business and the project business will remain lumpy. We will have service business that will continue to grow and continue to grow also throughout 2024 and support in this one, but we have a strong pipeline at this point because basically, all the factors that are underlying our business are still supporting the business. And -- but the economic concerns that are still out there are actually extending the sales cycle and that still affect, right, that it takes more time to actually conclude projects out there.

[Christian Harm, executive]

Maybe I'd pick up on that too Sebastian. And you know what, I think looking at any one particular quarter and the amount of e-commerce in that quarter is probably not the right answer, but the trend shows that I've been describing that after really ramping up the capacities for e-commerce during Covid that there'd been a breather while the e-commerce companies kind of grew into that capacity. And the fact is they're coming back to the table now. And I think that's an important trend reversal in the trend. Coming back to the table and starting to order again and I think that's a good thing for the periods to come.

[Sebastian Growe, analyst]

Yes. And then if we think about the mix then going forward, and if I may pick you up on the e-commerce comment you made. This is now at around 40% of total order intake in '23. I also noticed that the large project share stand at certainly above 50% again. Obviously, there is some fresh memory from the past where big orders were not necessarily always too attractive from a profitability standpoint, to say the least. So can you just give us a bit of a sense how we should think about the mix going forward.

[Richard Smith, executive]

Sure. And let's be very clear, the orders that we've taken on board support our expectations in our drive to drive our margins in the SCS business back into double digits by the end of 2027. I think that's a very important starting point. In addition, our Dematic business works to get a good balance between different project sizes. -- different technologies and also get a very good balance with our service business. And so, the overall balance is a part of getting the mix rate on for our Dematic business. I think that it's also fair to say that the tremendous interruptions that the world experienced coming out of the golden period, happier behind us. In addition, we've built quite a bit of operational agility to deliver good projects during and during volatile times. That was a very strong and is a very strong element of improving the project management processes, the contracting processes, the ordering and material supply processes in our Supply Chain Solutions business. So, I think all those are very -- are key parts of our profitability increase in the periods to come as well as the growing revenue that will be helping our profitability as well. So, we're expecting and we're delivering the increases that we've said, and we expect to continue to do so.

[Sebastian Growe, analyst]

One very quick question on IT&S and that is going to the repositioning of the brands. If you should sketch it on a scale from 1 to 10 is good one as a start. Where do you stand in the sense of sort of having this repositioning under good control. And obviously, the backup of the question is how much sort of scale and the room to grow in terms of margin leeway. What do you think is still there in that particular item.

[Richard Smith, executive]

Sebastian, we've got very strong brands in our company. The ITS segment is where you're asking, the steel brand and our Linden Material Handling brand and our Bali brand are all very well performing brands. They are well positioned. And of course, we continue to refine those. But I'd say that we're pleased with how the brands are performing. We're pleased with the positioning [ Youtube ] is working on. They're taking market share from the competition over time, and that's where we're driving this. I think that the brand capability is an important element of our business model, and we're pleased with the developments the brands are taking.

[Operator]

Today's last question comes from the line of Lucas Ferhani with Jefferies. Please go ahead.

[Lucas Ferhani, analyst]

Hello.

[Richard Smith, executive]

Yes, Lucas. Yes, please. Go ahead.

[Lucas Ferhani, analyst]

If I may push you again on the Supply Chain Solutions margin. How do you see the development in H1 versus H2 2023? Should you see a bit of increase already? Or do you expect it on a similar level sequentially?

[Richard Smith, executive]

So, Lucas, we were really pleased to deliver what we said we would deliver last year. We called from the beginning of last year that the second half would be stronger than the first half. Our expectations for this year are that the second half of this year will also be stronger than the first half this year. As we described, we'll be working through and closing of further legacy projects in the first half of this year. Second half of this year will also benefit from the kicking in of some of the streamlining measures we've taken to streamline the cost base in SCS. So, I expect a stronger second half this year than the first half this year.

[Lucas Ferhani, analyst]

And sorry, any comment on H1 '24 versus H2 '23 on the margin?

[Richard Smith, executive]

No, Lucas, we did what we said we'd do last year, and we're going to do what we said we do again this year, second half this year will be stronger than the first half of this year, and we'll be returning our Supply Chain Solutions step at a time to beyond 10% between now and the end of 2027.

[Lucas Ferhani, analyst]

Perfect. The second one is on the balance sheet. There was a change, obviously, in the outlook from S&P. Can you give us an update here on the covenant test, I think it was on hold. Is it now back? And also, was the key KPI for leveraged S&P is looking at?

[Richard Smith, executive]

What the S&P actually did when they published on the 5th of February was that we have made up their mind in terms of how they would look at that in the context of their latest captive guideline that they had put out last year. And though they made up the mind to look at us at the entire business. The main KPIs that they are looking at is actually deleverage around 4% and the EBITDA margin, right? That's the second piece they're looking at or above 16%. So that's the 2 elements that we are looking at right now after they have made up their mind that they look at us in say a total business, right, and not trying to separate out the leasing business from the rest of the -- that margin, though, is [ Standard & Poor's ] specific, right? It's not exactly the margin that you find in the reports, right? Because [indiscernible] does some adjustments on the debt position as well as on the margins.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Rob Smith for any closing remarks. Mr. Smith?

[Richard Smith, executive]

Thank you very much, Alice, and thank each of you for joining our call today and the very good questions. We're looking forward to seeing many of you in person as we're out in the butt in the next weeks and months, and we'll look forward to catching you up on our first quarter results at the end of April. So, until then, thank you. Take good care. Bye-bye.

[Operator]

Thank you for choosing Chorus Call. Thank you for participating in the conference. You may now disconnect your lines. Goodbye.